What Happens to Pay When Employees Leave?
Recently, Facebook announced that employee pay would not change for the remainder of 2020, but they would adjust the pay of employees who move to lower-cost locations as of 2021.
The reaction on social media was fiery; how could you cut pay for employees? While I can empathize with the initial outrage that a company that already makes tens of billions further profiting because of reduced payroll costs, this is actually the right thing to do from a fairness perspective. Facebook does some controversial things; this is not one of them.
Let me explain.
The pay rates offered at any given company are usually set up by compensation and total rewards experts who have access to large, standardized market surveys of compensation data, similar to how a finance or marketing team might subscribe to a data platform that provides them with competitive insights and benchmarks.
Once a company sets its target pay, a standard practice if you have employees in other locations is to determine the percentage difference in pay rates associated with those locations and apply those to your salary ranges. Again, this is often determined by those same compensation experts using data from compensation survey providers.
To demonstrate this - if you’re a software engineer in Atlanta, and move to the Bay Area, you’d likely be getting a significant pay increase. This seems intuitive and fair, to make more money in a location where the cost of living is dramatically higher. Then, consider the converse: if you’re a software engineer in the Bay Area and moving to a lower-cost location, your pay would decrease. If the move was to a location like Chicago, Denver or DC, this may mean pay is 10% less. If you move to Minneapolis, it might be 15% less. The most important thing to note here is that the decrease in salary is related to cost of living, but the difference in pay is actually (and often) smaller than the difference in cost of living. In other words, if you relocate from San Francisco to Minneapolis, the cost of living might be 30% less but the pay differential might be half that. So while the decrease in pay is a cost savings for employers, the benefit to individual employees is often even greater, especially in locations with lower income and property taxes.
In addition, the rise in remote tech work in the past few years has already had an impact on pay. The difference in pay for certain cities relative to premium markets like San Francisco have actually been decreasing over the past couple of years. Three years ago, the difference in pay for an engineer in Denver may have been 15% less than in San Francisco; now it’s closer to 10%. It remains to be seen what the movement of employees as a result of COVID-19 will do to market pay rates, but they will likely remain competitive and outpace the difference in cost of living.
All that said, I want to re-emphasize how much the cost of labor in a given location is already part of market pay structure. At large companies there are often a combination of real estate, facilities, finance and/or workforce planning teams that are balancing where to hire employees based on the availability of talent in a given location, the markets into which they want to expand and the cost of doing so. There is a reason that over 50% of Facebook’s current open job postings in North America are outside the Bay Area; a combination of where the talent is located, where it needs to be, and the cost. This is a deliberate, carefully studied and common best practice for large or growing organizations - to take total cost of employment into consideration, and to hire deliberately outside of their most expensive markets.
Even with data, this still may feel unfair or wrong to individuals considering a move outside of cities with high cost of living. It's understandable - nobody wants to take a pay cut. Here are some more things to consider, while thinking about the fairness-factor:
Consider the view of the employees already in another market; if an employee is paid market rates for San Francisco, which are the highest in the country, and that employee moves to Minneapolis, is it fair that they are paid 15%+ more than peers in that location for the same role?
At a macroeconomic level for a company the size of Facebook, which has tens of thousands of employees, what happens when a significant portion moves to a smaller city with unadjusted pay? What is the impact on the local economy, affordable housing, and other economic impacts we’ve seen arise when high-paying, large tech companies expand?
A note that this post is geared toward large organizations whose employees are making, on average, 2x to 5x+ the national median salaries. The practices described here are often adopted by smaller companies as well, but may be modified (eg, allowing employees to keep their pay rate after they move but not getting increases for a few years, or allowing a few one-off employees to not change their pay).
The compensation analysts at Facebook and similar companies, who are fluent with market pay in all geographies, are doing their jobs. By ensuring fair market pay according to location, they are able to be more equitable to employees and to the cities in which they employ people.
If your company is facing challenges in structuring compensation, or looking to align your pay practices to be competitive with the market, it's something our team is knowledgeable and passionate about. You can find out more information here.